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The trillions of dollars of stimulus from governments around the world have prompted the recovery of financial markets and economies. Kim Parlee talks with Phil Davis, founder, philstockworld.com about the risks to the markets when stimulus starts to recede.
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- Hello, and welcome to the show. I'm Kim Parlee. Thank you so much for joining us. I want to start the show by taking a look at a one-year chart of the S&P 500. We all know it well.
Equities have had a sharp rebound since COVID-19 hit North American shores, but volatility is back. Uncertainty persists around multiple COVID waves and the US election and a very quick news cycle. The big question is where do markets go from here? Phil Davis is founder of philstockworld.com, and also managing director of PSW Investments. He's here to give us his thoughts on that.
Phil, it is great to see you. I'm going to jump right in. There's a lot to cover here. But if people take a look at your blog, philstockworld.com, they will see that you're not terribly bullish on the markets right now. One of the big reasons is stimulus. And that's the big news as of an hour ago, is that stimulus might get halted until after the election. So give me your take on that and why stimulus matters so much to the equity markets.
- Well, look. The simple thing about it is the stimulus is keeping the economy alive. So even though we had in the US 34% reduced GDP in the second quarter, we're probably around 15% to 17% down in the third quarter. And maybe if we're lucky, we'll get back to minus 5% by quarter four.
These are not good numbers, and those are with trillions and trillions of dollars in stimulus. So far, the government has directly injected 2.2 trillion direct dollars into stimulus, but they've also spent other money. The Fed has put $4 trillion to work. Well, Trump just said no to another couple of trillion dollars. But even so, $6 trillion is 1/3 of the entire GDP of the United States.
So with that kind of stimulus, this is all we're managing to get out of it. If you take away that stimulus, either the stimulus ends, or we hit some massive inflation. One of those two things are going to happen in the future, and either way, it's very tricky for the markets.
- The second thing you have, of course, is the retail collapse. And if you take a look, and maybe you could run through with just what you're seeing there and what that means.
- Well, if you look up the last retail sales report, you'll see that there was some horrifying numbers. I mean, you had a 21% drop in food services, 19% drop in department stores, 35% drop in clothing stores, 17% drop in gas stations-- that's not a surprise. Electronics stores are down 17%. Furniture stores are down 11%.
Think about where you live. This is where you go. These are the places you shop. This is your neighborhood. These are your neighbors who work at these stores, who own these stores. This has huge repercussions, and again, this is with the stimulus. These are the horrific numbers that we've seen.
Money is moving away from the things that support our towns and our malls and our shopping areas and everything. Obviously, Amazon benefits. Other things benefit. But when you change society like this, the upheaval has long-lasting repercussions, and we're not really taking that into account. The market's acting like everything's fine, but meanwhile, there's a huge dislocation of the people in the economy.
- And I guess the source of all this is COVID-19, the last factor in terms of why you're not so bullish right now. And we're just still getting a sense of it. I mean, you live United States. Cases are up, and we're seeing them move up around the world as well.
- Right. So, look. When we say not bullish, I'm not bullish on the market like it's one big thing. You have to pick your sectors. You have to find the things you want to rotate into. You have to look for what does do well in a pandemic and what doesn't do well in a pandemic or in a long-term recession-- which is probably what we're going to be looking at.
The virus, obviously, is not cured. Only 10% of the population has it. So only 10% of the population has been exposed and has antibodies so far. You don't build herd immunity until about 60% of the population has been exposed. We are miles away from that, and if there is no vaccine-- which is actually very doubtful that there'll be a vaccine-- this thing can go on for another year. And we don't have that kind of money for stimulus. It's either we're going to have to let the economy normalize at the lower level, or they're going to have to put in so much stimulus that that inflation is going to go out of control.
- Phil, always great to talk to you. You take care. We'll talk to you soon.
- Thanks, Kim. Great talking to you.
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Equities have had a sharp rebound since COVID-19 hit North American shores, but volatility is back. Uncertainty persists around multiple COVID waves and the US election and a very quick news cycle. The big question is where do markets go from here? Phil Davis is founder of philstockworld.com, and also managing director of PSW Investments. He's here to give us his thoughts on that.
Phil, it is great to see you. I'm going to jump right in. There's a lot to cover here. But if people take a look at your blog, philstockworld.com, they will see that you're not terribly bullish on the markets right now. One of the big reasons is stimulus. And that's the big news as of an hour ago, is that stimulus might get halted until after the election. So give me your take on that and why stimulus matters so much to the equity markets.
- Well, look. The simple thing about it is the stimulus is keeping the economy alive. So even though we had in the US 34% reduced GDP in the second quarter, we're probably around 15% to 17% down in the third quarter. And maybe if we're lucky, we'll get back to minus 5% by quarter four.
These are not good numbers, and those are with trillions and trillions of dollars in stimulus. So far, the government has directly injected 2.2 trillion direct dollars into stimulus, but they've also spent other money. The Fed has put $4 trillion to work. Well, Trump just said no to another couple of trillion dollars. But even so, $6 trillion is 1/3 of the entire GDP of the United States.
So with that kind of stimulus, this is all we're managing to get out of it. If you take away that stimulus, either the stimulus ends, or we hit some massive inflation. One of those two things are going to happen in the future, and either way, it's very tricky for the markets.
- The second thing you have, of course, is the retail collapse. And if you take a look, and maybe you could run through with just what you're seeing there and what that means.
- Well, if you look up the last retail sales report, you'll see that there was some horrifying numbers. I mean, you had a 21% drop in food services, 19% drop in department stores, 35% drop in clothing stores, 17% drop in gas stations-- that's not a surprise. Electronics stores are down 17%. Furniture stores are down 11%.
Think about where you live. This is where you go. These are the places you shop. This is your neighborhood. These are your neighbors who work at these stores, who own these stores. This has huge repercussions, and again, this is with the stimulus. These are the horrific numbers that we've seen.
Money is moving away from the things that support our towns and our malls and our shopping areas and everything. Obviously, Amazon benefits. Other things benefit. But when you change society like this, the upheaval has long-lasting repercussions, and we're not really taking that into account. The market's acting like everything's fine, but meanwhile, there's a huge dislocation of the people in the economy.
- And I guess the source of all this is COVID-19, the last factor in terms of why you're not so bullish right now. And we're just still getting a sense of it. I mean, you live United States. Cases are up, and we're seeing them move up around the world as well.
- Right. So, look. When we say not bullish, I'm not bullish on the market like it's one big thing. You have to pick your sectors. You have to find the things you want to rotate into. You have to look for what does do well in a pandemic and what doesn't do well in a pandemic or in a long-term recession-- which is probably what we're going to be looking at.
The virus, obviously, is not cured. Only 10% of the population has it. So only 10% of the population has been exposed and has antibodies so far. You don't build herd immunity until about 60% of the population has been exposed. We are miles away from that, and if there is no vaccine-- which is actually very doubtful that there'll be a vaccine-- this thing can go on for another year. And we don't have that kind of money for stimulus. It's either we're going to have to let the economy normalize at the lower level, or they're going to have to put in so much stimulus that that inflation is going to go out of control.
- Phil, always great to talk to you. You take care. We'll talk to you soon.
- Thanks, Kim. Great talking to you.
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